• Equities outperformed in 2021
• Stay invested in 2022
• Hold some defensive names with strong core earnings

Equities have outperformed other assets including bonds

Equities in general have outperformed in 2021 and with attractive returns versus other assets. This was even more remarkable in view of concerns throughout the year about inflation, the on-going coronavirus and the latest Omicron variant, supply chain disruptions, as well as technology weakness and sell-down in China due to regulatory changes, especially in the third quarter of 2021. In 3Q21, the MSCI China Index fell 18.4%, while the NYSE FANG+ Index fell 3.7%. By 4Q21, most equities regained some of the 3Q21 losses, but Chinese stocks remained lacklustre due to a wide range of domestic factors. This in turn affected both the Hang Seng Index and the Shanghai Shenzhen CSI 300 in 2H 2021. In comparison, Singapore’s Straits Times Index largely outperformed QoQ and YTD against some of the bigger markets in the region. By mid-December, the STI has added 10.3% – one of the best performing markets in this region.

Omicron new downside?

One of the key areas of market focus heading into 2022 is likely to be on the two years old Covid-19 virus. This pandemic is unlikely to end any time soon and any new variant or new cure will have a significant impact on equities. While the economic and financial impact from the new Omicron variant is still largely unknown at this juncture, there were initial concerns which led to a decline for most equity indices on fears of the resultant impact on global growth. While the situation seems to have stabilised for now, the pace of re-opening is slowing as governments around the world assess the possible effects and measures. Asian equities were vulnerable to renewed Omicron jitters recently, but most indices have since recovered as risk-on sentiment came back into play when initial Omicron fears subsided. This is likely to be the situation going forward into 2022, as the Covid virus evolves, and any uncertain new variants could bring about severe volatility in the market.

Inflation remains a concern

Besides Covid, another issue that will continue to dominate the investment landscape going into 2022 is likely to be on inflation, especially in some of the key economies such as the US and China. We expect the US Federal Reserve to focus on the tighter labour market (with November 2021 unemployment at 4.2%), and taper its quantitative easing faster given rising concerns about inflation. If inflation pressures stay elevated, the Fed may start to increase rates earlier than expected. In China, we are forecasting GDP growth to fall from a high 7.9% in 2021 to 5.5% in 2022.

Earnings continue to improve…

Optimism about earnings recovery led markets higher in 2021. Earnings rose in the last quarter (3Q 2021), largely supported by improving economic conditions. After the sharp improvement in earnings in 2021, general market expectation is for earnings to remain healthy in 2022, but the growth rate is projected to ease off from the high levels in 2021. Based on the MSCI World Index, earnings are projected to ease off from 14.0% this year to 6.3% next year. In recent months, with tightening supply chain concerns, largely caused by the sharp economic pick-up in 2021, this could also affect earnings if the bottlenecks continue. However, based on recent data, both US and Europe are seeing an improvement in supply chain indicators in November 2021.

Short term volatility to remain

As shared above, we expect near term volatility to continue. This could also mean greater volatility for higher growth companies. In this environment, it is reasonable to put some funds into companies that are more defensive or have stable core earnings. In Singapore, our picks are Ascendas REIT, CapitaLand Integrated Commercial Trust, CapitaLand Investment Ltd, DBS Group Holdings Ltd, Frasers Centrepoint Trust, Frasers Logistics & Comm, Mapletree Industrial Trust, NetLink NBN Trust, Raffles Medical Group, SATS Ltd, Sheng Siong Group, Singapore Telecommunications, ST Engineering, United Overseas Bank, UOL Group, Venture Corp and Wilmar International. (Carmen Lee)